FINNING INTERNATIONAL INC. $19

FINNING INTERNATIONAL INC. $19 (Toronto symbol FTT; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 168.0 million; Market cap: $3.2 billion; Price-to-sales ratio: 0.5; Dividend yield: 3.8%; TSINetwork Rating: Above Average; www.finning.com) sells and services Caterpillar-brand heavy equipment in Canada, South America and the U.K. Its main customers are in the oil, mining, forest-products and construction industries. The company continues to cut costs as low commodity prices hurt equipment demand. Finning recently announced plans to eliminate about 500 jobs by mid-2016. That’s in addition to the 1,900 workers, or 13% of its global workforce, laid off last year. Because of the moves, Finning has already reduced its annual expenses by $150 million, and expects higher savings this year. Meanwhile, the company lost $161 million, or $0.94 a share, in 2015. If you exclude writedowns and other unusual items, Finning earned $1.29 a share. In 2014, it earned $318 million, or $1.85 a share. Overall revenue declined 10.5%, to $6.2 billion from $6.9 billion. Sales of new equipment fell 24.2%, rental-equipment revenue fell 18.2%, and product-support revenue declined 0.9%. However, used-equipment sales gained 25.8%. Finning’s sound balance sheet will help it cope while it waits for commodity prices to recover. Its long-term-debt of $1.5 billion (as of December 31, 2015) is a high 47% of its currently depressed market cap. However, it doesn’t have to start repaying most of these loans until after 2020. It also held cash of $475.0 million, or $2.83 a share. Finning’s earnings in 2016 will likely improve to $1.30 a share, and the stock trades at a reasonable 14.6 times that estimate. Moreover, Finning continues to pay quarterly dividends of $0.1825 a share, for an annualized yield of 3.8%. In 2015, those payments accounted for a moderate 38% of its $325 million free cash flow (cash flow less capital expenditures). The current payout seems sustainable. Finning is a buy.

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